Wisconsin labor protestPopular revolts and populist stirrings in the Middle East and the American Midwest have fixated Wall Street lately.

At first glance, the connection between rebels in Libya and public sector union demonstrators in Wisconsin is hardly obvious. But both are vital to markets right now, since how those movements fare will determine the direction of key macroeconomic trends that could propel or derail the blooming economic recovery.

Both are also keys -- in rather unexpected ways, perhaps -- to the inflationary fears that have been growing lately -- not just on Wall Street but on Main Street. For all the attention focusing on the inflationary role of rising oil prices, it may be the disintegrating power of organized labor on full display in Wisconsin that keeps inflation in check.

Stagflation Fears

For plenty of pundits, the imminent arrival of major inflation is a foregone conclusion, thanks to the Fed's nearly unprecedented easing of the money supply following the financial crisis. These economy-watchers point to the rising prices of a range of commodities, from metals to cotton to foodstuffs, as evidence that their predictions are playing out.

Surging oil prices are only adding to that panic. The pessimistic view is that crippling, 1970s-style stagflation is in the cards as spiking energy costs put the brakes on economic growth and reduce consumer purchasing power in one blow.

But rather than succumbing to the alarmism of any of these hyperinflationary scenarios, investors are better off taking a more measured approach. A recent research note by Citigroup (C) stock strategist Tobias Levkovich points to why.

What Causes Real Inflation? Wage Growth

Despite all the worry over the impact of rising oil prices, recall that the U.S. is now a largely services-based economy, and observe that the rising wages that have led to real overall cost rises in decades past are nowhere to be found today. In the inflation pessimists' superficial comparisons of the current environment to the 1970s, the dwindling impact of labor unions is often overlooked.

"[I]nvestors often forget that cost of living adjustments built into labor contracts during the late 1960s and early 1970s, when the private sector had 25%-30% unionization rates, forced upward pressure on companies across the business spectrum and causing a massive change in inflation expectations," Levkovich wrote. "Such conditions do not exist currently due to productivity enhancement via technological advances, outsourcing and offshoring."

Levkovich makes a compelling argument when he dismisses the widespread concerns about oil prices. He points out that oil rose from $9 a barrel in 1998 to $147 in 2008, a steep climb that nonetheless hardly resulted in a surge in the consumer price index. The low rate of private sector unionization -- from 6% to 7% -- may have helped prevent prices from spiraling upward.

Investors Aren't Worried About Inflation

Of course, the more conspiratorial of the inflation alarmists have another explanation: CPI figures are manipulated to understate inflation, they argue.

On that topic, Levkovich echoes a point recently made in a research note by Jim O'Neill, the high-profile head of Goldman Sachs Asset Management (GS): If the figures are simply being manipulated, why do inflationary pressures fail to show up in both investor and consumer perceptions?

"Intriguingly, the 10-year TIPs [Treasury Inflation-Protected Securities] breakdown level does not suggest that the bond market is overwhelmingly anxious about any spike in core CPI trends, plus the University of Michigan long-term inflation survey data is also not suggesting an imminent change in inflation expectations," Levkovich writes.

These points should help clarify the debate currently intensifying about whether the Fed should start to tighten the money supply and raise interest rates just as the economy is picking up some momentum.

Despite plenty of howling from a certain variety of pundits, any evidence of runaway inflation is scant. And investors need look no further than the other half of the Fed's mandate -- promoting employment -- to see why.

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Just one more thing... It has been estimated that when you include all the governments debt obligations (the ones that are kept off the books like medicare and social security) it is from a low of 45 trillion to 200 trillion dollars!... Even if you only accept the low figure that's about $150,000.00 for every man, woman and child in the USA... Or the higher estimate is $666,000.00 for every man, woman and child!.. Who of us could survive if we ran our household that way?.. We would be bankrupt and so would the USA if it wasn't for its creditors, Its fading status as the reserve currency of the world, and their ability to print money out of thin air!... Ask yourself, How long can this be sustained?... Food for thought.

March 02 2011 at 9:14 AM Report abuse rate up rate down Reply

Three words... Unprecedented Governmental debt!... That all you need to know, Its no different than the banking crisis... They have just shifted the debt burden to the government, Thereby us! There will be ups and downs, but the long term doesn't look good at all.

March 02 2011 at 9:02 AM Report abuse +2 rate up rate down Reply

Why, if their were no workers, just think how much money investors could make.

March 01 2011 at 6:25 PM Report abuse +1 rate up rate down Reply
3 replies to koos458's comment

Yah, right...nothing to see here folks. No inflation at all. Just ignore those pesky gas pump prices and skyrocketing grocery bills and global unrest due to price inflation on food. Now move along...

March 01 2011 at 5:28 PM Report abuse +4 rate up rate down Reply
1 reply to rslpilot's comment

Waaaah...I only make 50% more than the private worker and have excellent benefits. It's not enough that I get to retire at 50 with 70% pay and medical 'till I die (while the private sector worker has to work, and pay taxes to support me, until he's 70, then retire with what he scrimped together in his 401K on medicare) Wahhhhhhh....gimmee, gimmee, gimmee!

March 01 2011 at 5:17 PM Report abuse +1 rate up rate down Reply
2 replies to rslpilot's comment

About time the private sector started fighting for better wages and benefits, don't cha think?

March 01 2011 at 6:47 PM Report abuse +1 rate up rate down Reply

Should we be crying because we in the private sector lost our 20th century lifestyle and expectation and the public sector somehow retained it? It doesn't seem to me that it is the public sector that is really the ones that are whining.

March 02 2011 at 9:15 AM Report abuse rate up rate down Reply
hi cat

When the Corporations negotiate for their tax breaks and government grants where does the TAXPAYER sit at THAT table? Nowhere. The politician hack who just came back from a all expense trip to Las Vegas with a suitcase of "souvenirs" will give that " lobbyist friend" the whole store and the kitchen sink when it comes time to vote. ( OUR STORE AND OUR KITCHEN SINK) Remember OBAMA SCARE ? I say YES a TAXPAYER should be at the bargaining table when the unions and Government work out contracts. ( WHAT WAS the corporate line against the UAW .... they were a private company and a private union??) These Aliens to democracy are just against ANY union, ANY individual or ANY IDEA that makes them have to wait in a line just like the rest of us for a movie ticket or a loaf of bread. But that is what they abhor so much... didn't you recognize they are truly gentry ??

March 01 2011 at 5:00 PM Report abuse +2 rate up rate down Reply
1 reply to hi cat's comment

Don't confuse Democracy with freedom. Many a tyranical dictator was "democratically" elected--Hitler, for one. Thats why we have a Republic

March 01 2011 at 5:23 PM Report abuse +2 rate up rate down Reply

Listen for the words Emerging Markets. New buzz word for It's a Global World.

March 01 2011 at 4:40 PM Report abuse +4 rate up rate down Reply
1 reply to jdrumerrnr's comment

Someday we'll here about re-emerging markets, like the U.S. : )

March 02 2011 at 9:16 AM Report abuse rate up rate down Reply

By the end of the year you would be most fortunate to be holding silver or gold , something of actual tangible quality away from all the smoke and mirrors and soon to be worthless fiat currency printed into oblivion. There is no such thing as a flight to safety , the only safety being in the grace of our lord .. Brothers and Sisters , may you hold on through the storm that approaches! And believe me , the great Economic Recovery that is being fed to you daily in all the propaganda is a myth!

March 01 2011 at 4:23 PM Report abuse +7 rate up rate down Reply


March 01 2011 at 4:18 PM Report abuse +5 rate up rate down Reply
3 replies to bhawkes328's comment

Im shocked that Joe lazzaro hasn't written one of his feel good ''everything is wonderful''...""things have never been better'' articles today ....where are you Joe ...I miss your Fairy Tale Bullsh*t journalism !!!!!!!

March 01 2011 at 4:06 PM Report abuse +4 rate up rate down Reply